Saudi Arabia: The SAMA Draft Audit Committee Regulation For Insurance And/Or Reinsurance Companies

Last Updated: 30 September 2011
Article by Peter Hodgins and Alexis Golding

Introduction

The Saudi Arabian Monetary Agency (SAMA) published its Draft Audit Committee Regulations for Insurance and/or Reinsurance Companies (the Regulation) on 23 July 2011. The Regulations, which expand significantly upon the provisions of the Capital Market Authority's Corporate Governance Regulations effective 12/11/2006, are far reaching and include obligations for the Audit Committee to submit reports and recommendations directly to SAMA. This article sets out the requirements of the Regulation.  

Creation and maintenance of an audit committee is mandatory for all insurers and reinsurers in the Kingdom and non-compliance will subject Companies to enforcement action by SAMA.  We do not yet have detail as to the nature of SAMA's "enforcement". Companies must establish suitable written controls and procedures to ensure and monitor compliance (including compliance of all contracted parties). Companies must also maintain adequate records to demonstrate their compliance with the Regulation (for example, minutes of meetings held and reports and recommendations issued). Further, in accordance with Article 9(g) of the Corporate Governance Regulations, the result of annual audits and the effectiveness of internal control procedures of Companies should be included in the report of the Company directors (as appended to the financial statements of the Company).

Activities and Independence of Audit Committee

Pursuant to the Regulation, the audit committee is entitled to directly contact all employees, committees, legal consultants, internal and external auditors in the Company's head office and/or branches, in addition to the other stakeholders in order to conduct its activities.  The audit committee also has the right to check all registers and documents (private and confidential) and all audit committee members are bound to preserve the confidentiality of their activities. In order to ensure their impartiality, Article 18 of the Corporate Governance Regulations and sections 11 and 12 of the Regulation, a member of the audit committee is not entitled to have any direct or indirect interest in the Company's work or take part in any work that might compete with the Company.

The Company must not issue or renew any insurance policy to any committee members or related stakeholder unless they have paid the premium in full. If any of the committee's members submits a request for payment of a claim under their policy of insurance from the Company, the claim should be structured in accordance with Article (44) of the Implementing Regulation of the Law on Supervision of Cooperative Insurance Companies and the Compliance Officer should be notified of any compensation paid.

Setting up the Committee and organising its Activities

Appointing Members/Membership Period

According to Articles 13 and 14 of the Corporate Governance Regulations, a suitable number of committees should be set up (in accordance with a Company's requirements and circumstances) in order to enable the Board to perform its duties in an effective manner. The audit committee is one such committee. Article 13(b) of the Corporate Governance Regulations states that "the audit committee should notify the Board of its activities findings or decisions with complete transparency".

With SAMA's written approval, the audit committee will be decided and set up by the Company's Board for a three year term. The Board may renew the term for a further three years upon receipt of SAMA's written approval.

SAMA has the right to dismiss a member of the audit committee in case of any violation of the Regulation or the Law on Supervision of Cooperative Insurance Companies and its Implementing Regulation. Members of the committee may resign by request submitted to the Board three months prior. Any member of the committee will be considered resigned if he fails to attend three consecutive committee meetings without providing the board with acceptable reason for his non-attendance.

Should a vacant position arise in the audit committee, having gained SAMA's written approval, the board may appoint a new member to complete any outgoing member's term of appointment.

Membership of the Audit Committee

Article 14 of the Corporate Governance Regulations sets out that the audit committee members should not be less than three (including a specialist in financial and accounting matters). This is elaborated on by the Regulation which states the audit committee should exist of 3-5 members. The majority must be outside of the Company's Board and members should not be appointed among the company's executive managers, employees or consultants. A committee member may not sit on the Board or audit committee of any other insurance-sector company and may not be a founder of any similar company.

Article 14(b) of the Corporate Governance Regulations details that, the general assembly of shareholders shall, upon the recommendation of the Board, issue rules for appointing the audit committee members.

An audit committee member should be familiar with financial issues, accounting, financial reporting and insurance company audit as well as sector-related laws and regulations.

Appointing the Committee President and Secretary

On receipt of SAMA's written approval, the Board of Directors may appoint one of the audit committee's members as its President. The Chairman of the Board should not be a member or President of the audit committee. The committee secretary should deal with administrative tasks, prepare minutes, (ensure minutes are signed by the committee's members) and schedule the committee's meeting dates in coordination with its President. 

Committee Members Compensation

According to section 30 of the Regulation, the audit committee members should be paid for each committee meeting attended (as determined by the Board).

Committee Responsibility

The audit committee's tasks were outlined in brief in Article 14(c) of the Corporate Governance Regulations. They are elaborated on in section 31 of the Regulation and include:

  1. Submitting recommendations to the Board to approve the appointment or reappointment of external auditors, the compliance control manager, the compliance officer, the manager of the internal audit department or the internal auditor and the actuary (on receipt of SAMA's written approval).
  2. Ensuring external auditor independence from the Company, Board and the senior management of the Company, the internal audit department or the internal auditor in performing their tasks and the compliance control department or the compliance officer in performing their tasks.
  3. Ensuring the company's compliance with actuary recommendations.
  4. On obtaining the board's written approval, determining the monthly salary and bonus of the compliance control department manager or the compliance officer and the internal auditor.
  5. Reviewing the audit plan of the internal and external auditors and the critical accounting policies and procedures.
  6. Coordinating internal and external auditors.
  7. Reviewing both the internal and external auditors' reports, reports of the compliance control department or the compliance officer, SAMA's comments and those of the actuary and thereafter submitting related recommendations to the Board.
  8. Reviewing the internal and external auditors' assessment of the internal control processes.
  9. Assessing the competence level, efficiency and objectivity of the external and internal auditors, and the compliance control department/compliance officer.
  10. Following up on SAMA reports and other related supervisory entities in addition to international developments (e.g. International Association of Insurance Supervisors) and submitting related recommendations to the Board.
  11. Reviewing, approving and discussing annual and quarterly financial statements with the external auditors and the company's management prior to their issue.
  12. Following up on legal action involving the Company and submitting related periodic reports to the Board.

Committee Responsibility

The Regulation states that audit committee members are accountable to SAMA, the Company's shareholders as well as the Board for implementing the Regulation and executing the committee's action plan. In performing tasks, the committee's members should give priority to the Company's interest above all other.

Relationship between the Audit Committee and the External Auditors

Important issues that must be considered between the committee and the external auditors include:

  1. Key amendments to accounting policies made by the Company.
  2. Main conflicts with management regarding asset protection and internal control.
  3. Any violations of laws, regulations and instructions or non-compliance with Company policy.
  4. Comments from other auditors on accounting policies, reports and professional conduct.
  5. Any deficiencies in the general structure of the internal control systems.
  6. Errors in financial statements.
  7. Management decisions and the extent to which they were relied upon by external auditors to validate accounting estimations (such as allocations and technical reserves).
  8. Accounting principles, standards and disclosure decisions related to extraordinary transactions.
  9. Adequacy of technical provisions and reserves set by the Company and approved by the actuary.
  10. Actuary reports.
  11. Key issues regarding the management that might have affected auditing activities.
  12. Internal controls and assessment of the company's assets and financial solvency.
  13. Any amendments introduced to the audit scope.

Committee Meetings/Decisions

To be quorate, 2/3 of members must be present for a committee meeting.  Meetings must be held at least 6 times a year but further meetings may be held:

  1. At the Chairman's request;
  2. At the external auditor, internal auditor, compliance officer or actuary's request; and
  3. If there are issues to be dealt with relating to: financial and audit issues, compliance issues, conflicts of interest, professional and ethical codes of conduct.

Audit committee decisions will be made on majority vote and voting by proxy is not permitted.  If there is no majority, the President will have the casting vote, (providing the secretary notes the views of the other parties in the minutes). The committee may invite appropriate staff to attend meetings as necessary.

The audit committee must develop a detailed action plan for the Company stating, roles, responsibilities and mandate, provided the action plan for the Company is approved for implementation by Board decision.

The Committee's Connection with Related Parties

The Chairman of the audit committee must provide SAMA with copies of reports, recommendations and related decisions issued by the Company within 7 working days. The audit committee must submit its reports and recommendations to the Board direct in order that they may take any necessary actions or appropriate decisions.

The manager of the internal audit department or the internal auditor must submit reports directly to the audit committee in case of any financial or non-financial non-compliance with the Company's internal systems or, in case of non-compliance with the internal audit manuals and the implementation of the internal audit decisions.

The manager of the internal audit department or the internal auditor must send SAMA reports submitted to the audit committee within 7 working days and report directly to the Chairman of the Board with respect to administrative roles and functional performance. None of the Company's executive managers will have authority over the internal audit department manager or the internal auditor. In addition, the Company cannot remove the manager of the internal audit department or internal auditor unless it has written approval from SAMA.

The manager of the compliance control department or compliance officer must submit reports directly to the audit committee in case of any violations or infringements of the Law on Supervision of Cooperative Insurance Companies and its Implementing Regulation or SAMA's regulations, instructions and the manager of the compliance control department or compliance officer must provide SAMA with copies of reports submitted to the audit committee within 7 working days, the manager of the compliance control department or the compliance officer must report directly to the Chairman of the Board regarding administrative roles and functional performances.  None of the Company's executive managers have authority over the compliance control department manager or compliance officer. In addition, the Company cannot remove the manager of the compliance control department or the compliance officer unless it has a written approval from SAMA.

Next Steps

SAMA request comments on the draft regulation within 60 days of its publication. We wait to hear further from SAMA regarding publication and enforcement of the Regulation. Upon publication, it will be important for Companies to ensure that they are in compliance with the requirements of the Resolution.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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